Security A has a beta of 1.0 and an expected return of 12%. Security B has a beta of 0.75 and an…

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Security A has a beta of 1.0 and an expected return of 12%. Security B has a beta of 0.75 and an expected return of 11%. The risk-free rate is 6%. Both these two securities are in the same market. Explain the arbitrage opportunity that exists; explain how an investor can take advantage of it. Give specific details about how to form the portfolio, what to buy and what to sell (we assume that the company-specific risk can be neglected).

 
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